Labor Mobility Restrictions and Debt Choice: Evidence from the Inevitable Disclosure Doctrine

Abstract

Prior literature finds that staggered state-level adoption of the Inevitable Disclosure Doctrine (IDD) significantly constrains labor mobility. Using the IDD as an exogenous shock to labor mobility, we find that firms headquartered in states that adopt the IDD gravitate towards bank loans for external debt financing. We propose two channels, information asymmetry and substitution of governance, through which labor mobility restrictions affect debt choice. Our results provide support for the information asymmetry channel, which suggests that firms are more inclined to use bank debt financing when their information environment deteriorates. We also find that the effects of labor mobility restrictions are more pronounced for firms with high innovation intensity, skilled labor, and high asset specificity.

Keywords: Labor mobility, debt choice, inevitable disclosure doctrine.

JEL Classification: G32, J60, O34